(13)	Stock-Based Compensation

The fair value of all awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

Bancorp currently has one stock-based compensation plan. At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. No additional shares were made available. As of June 30, 2016, there were 167,848 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015; however, options and SARs granted under this plan expire as late as 2025.

Options, which have not been granted since 2007, generally had a vesting schedule of 20% per year. Stock appreciation rights (“SARs”) granted have a vesting schedule of 20% per year. Options and SARs expire ten years after the grant date unless forfeited due to employment termination.

Restricted shares granted to officers vest over five years. All restricted shares have been granted at a price equal to the market value of common stock at the time of grant. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and 2016, forfeitable dividends are deferred until shares are vested.

Grants of performance stock units (“PSUs”) vest based upon service and a single three-year performance period which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the fair value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Beginning in 2015, grants require a one year post-vesting holding periods. For 2015 and 2016, the fair value of such grants incorporates a liquidity discount of 4.80% and 4.50%, respectively, related to the holding period.

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Grants of restricted stock units (“RSUs”) to directors are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, fair value of the RSUs is estimated based on fair value of underlying shares on the date of grant.

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:

	For three months ended						For six months ended
	June 30,						June 30,
(in thousands)	2016			2015			2016			2015
Stock-based compensation expense before income taxes	$	560		$	494		$	1,073		$	995
Less: deferred tax benefit		(196	)		(173	)		(376	)		(348	)
Reduction of net income	$	364		$	321		$	697		$	647

Bancorp expects to record an additional $1.1 million of stock-based compensation expense in 2016 for equity grants outstanding as of June 30, 2016. As of June 30, 2016, Bancorp has $4.8 million of unrecognized stock-based compensation expense that is expected to be recorded as compensation expense over the next five years as awards vest. Bancorp received cash of $1.0 million and $1.6 million from the exercise of options during the first six months of 2016 and 2015, respectively.

Fair values of Bancorp’s stock options and SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. This model requires the input of assumptions, changes to which can materially affect the fair value estimate. Fair value of restricted shares is determined by Bancorp’s closing stock price on the date of grant. The following assumptions were used in SAR valuations at the grant date in each year:

	2016			2015

Dividend yield		2.94	%		2.97	%
Expected volatility		19.31	%		22.81	%
Risk free interest rate		1.70	%		1.91	%
Expected life of SARs (in years)		7.3			7.5

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of options and SARs granted. Expected volatility is the volatility of the underlying shares for the expected term on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the options. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

A summary of stock option and SARs activity and related information for the six months ended June 30, 2016 follows:

													Weighted
							Weighted		Aggregate		Weighted		average
	Options						average		intrinsic		average		remaining
	and SARs			Exercise			exercise		value		fair		contractual
	(in thousands)			price			price		(in thousands)		value		life (in years)

At December 31, 2015
Vested and exercisable		656		$14.02	-	19.44	$	15.75	$	6,191	$	3.39		3.7
Unvested		266		15.24	-	24.55		18.66		1,733		3.29		7.7
Total outstanding		922		14.02	-	24.55		16.59		7,924		3.36		4.8

Granted		87			25.76			25.76		216		3.56
Exercised		(83	)	14.02	-	17.89		17.08		785		3.96
Forfeited		(1	)	15.24	-	15.84		15.47		8		2.90

At June 30, 2016
Vested and exercisable		664		14.02	-	22.96		15.82		8,238		3.29		3.9
Unvested		260		15.24	-	25.76		21.48		1,756		3.43		8.3
Total outstanding		924		14.02	-	25.76		17.41	$	9,994		3.33		5.1

Vested year-to-date		92		15.24	-	22.96		17.44	$	990		3.14

Intrinsic value for stock options and SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.

A summary of restricted common stock activity for the periods ending December 31, 2015 and June 30, 2016, is outlined in the following table:

				Grant date
				weighted-
	Number			average cost
Unvested at December 31, 2014		171,139		$	16.63
Shares awarded		52,898			22.99
Restrictions lapsed and shares released to employees		(61,205	)		15.89
Shares forfeited		(6,974	)		18.97
Unvested at December 31, 2015		155,858		$	18.98
Shares awarded		51,122			25.78
Restrictions lapsed and shares released to employees		(48,290	)		17.91
Shares forfeited		(8,596	)		20.64
Unvested at June 30, 2016		150,094		$	21.55

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Bancorp awarded performance-based restricted stock units (“PSUs”) to executive officers of Bancorp, the single three-year performance period for which began January 1 of the award year. The following table outlines the PSU grants.

	Vesting				Expected
Grant	period		Fair		shares to
year	in years		value		be awarded
2014		3	$	17.61		50,024
2015		3		20.02		31,887
2016		3		22.61		27,663

In the first quarter of 2016, Bancorp awarded 8,144 RSUs to directors of Bancorp with a grant date fair value of $200 thousand. In the second quarter of 2016, 1,018 RSUs were cancelled, leaving 7,126 RSUs outstanding with a grant date fair value of $175 thousand.